2018 is an election year, which means there are long odds against comprehensive entitlement spending reforms being enacted anytime soon. After all, there is a long, regrettable history of irresponsible campaign rhetoric on this subject, and it’s simply too easy to misattribute any near-term initiative to causes ranging from mean-spiritedness to ideological fervor to tax cuts. However, if one puts politics aside and looks only at the policy substance, there is no avoiding one clear conclusion: Federal entitlement programs require reform, the sooner the better.
This need for entitlement reform has nothing to do with ideology and everything to do with simple math. Entitlement program finances are on an unsustainable path due to exploding cost growth. Lawmakers will have to correct this at some point, and the sooner they do, so the less painful the corrections will be.
The Congressional Budget Office projects that the largest single entitlement program, Social Security, will spend $988 billion this year, by itself far more than all nonmilitary discretionary spending combined (and far more than all military spending as well). Social Security requires reforms to avert insolvency separate and apart from any effect it has on the larger federal budget. Each of the last two trustees’ reports, issued during different presidential administrations, has warned of this necessity in identical language: “Lawmakers should address these financial challenges as soon as possible.” The need to repair Social Security’s finances exists irrespective of any party’s political agenda.
The next-largest entitlement, Medicare — like Social Security — faces projected insolvency in its Hospital Insurance trust fund, a situation its trustees describe as a “substantial financial shortfall that will need to be addressed with further legislation,” best enacted “sooner rather than later to minimize the impact on beneficiaries, providers and taxpayers.”
Moreover, Hospital Insurance isn’t even the fastest-growing part of Medicare: its Supplementary Medical Insurance costs are greater and growing even faster, straining the federal budget and subjecting beneficiaries to rising premiums.
CBO has repeatedly found that runaway entitlement spending is at the root of worsening federal fiscal problems. The difficulty doesn’t originate on the discretionary (that is, annually appropriated) spending side: Such spending, including everything we spend on the military, has steadily receded from 13 percent of our GDP a half-century ago to just over 6 percent today. Nor does it have much to do with taxes, recent debates notwithstanding: revenue collections have fluctuated between 16 percent and 19 percent of GDP in most years.
The problem is with entitlements, which continually absorb an escalating share of economic output: roughly 5 percent of GDP 50 years ago, up to 13 percent today, and projected to hit 18 percent by mid-century — by itself, then spending more than 90 percent of projected federal revenue collections.
CBO projects deficits will reach catastrophic levels because spending growth will outstrip growth in federal revenues and in the underlying economy. CBO notes that non-interest spending growth is driven by “outlays for Social Security” and “the major health care programs,” which it defines as “Medicare, Medicaid, and the Children’s Health Insurance Program, as well as subsidies for the health insurance bought through the marketplaces under the Affordable Care Act.”
The math is clear and unavoidable: Until spending growth in these programs is moderated, no other fix to our budget woes will hold.
CBO is by no means an outlier in attributing our fiscal problems to entitlement spending. In 2013, I published a comprehensive study of federal fiscal policy, finding that over three-quarters of projected budget deficits were attributable to legislation enacted between 1965 and 1972 to establish and expand various entitlement programs.
Not only has there been no legislative fix to these problems, we’ve moved in the wrong direction the last several years. The Affordable Care Act, originally advertised as essential to moderating health cost growth, instead added to health spending. It also included a dramatic expansion of Medicaid in which the U.S. government is to pay 90 percent of the costs of care for the expansion population — not only an unsustainable but a grossly inequitable preferential treatment, relative to the 57 percent matching rate historically provided for Medicaid’s needier, previously eligible beneficiaries.
Only a very wise politician knows when is the right time to pursue entitlement reforms. Economic policy experts, however, know it should have been done a long time ago.